The New SCHIP Bill: The Senate Must Protect Private Coverage

The United States Senate will soon consider legislation to
reauthorize the State Children's Health Insurance Program (SCHIP).
Its decisions on that legislation will have a major impact on the
private health insurance coverage of millions of American
children.

The House of Representatives recently passed a major SCHIP
expansion and removed any provision to protect private coverage.
Among many other provisions, the House bill would extend the
program to target children in families with annual incomes of
$66,150, and in some cases even higher.[1] In other words, the House
version of the bill would expand the program beyond low-income
working families far into the middle class.

When the Senate considers the House legislation or a companion
proposal to expand SCHIP to children in families with higher
incomes, it should recognize that public program expansions would
result in "crowd-out," or displacement, of both private health
insurance coverage and funding. Expansions would impose higher and
unnecessary costs as the program enrolls children who would have
otherwise had private coverage. In particular, expanding
eligibility beyond the current target population becomes a
one-for-the-price-of-two proposition akin to taxpayers spending
$1.00 to get 50 cents worth of new coverage.

The Purpose of SCHIP

As part of the Balanced Budget Act of 1997, SCHIP was enacted to
provide assistance to uninsured children in low-income families.
The idea was to help working families that earned too much to
qualify for Medicaid but presumably not enough to afford private
coverage.[2] Originally, the purpose of the law was "to
initiate and expand the provision of child health assistance to
uninsured, low-income children in an effective and efficient manner
that is coordinated with other sources of health benefits
coverage."[3] With an initial appropriation of $4 billion
a year, Congress offered states a higher federal matching-rate
percentage than under Medicaid to encourage them to participate in
the new federal-state program.

Although it expanded public assistance beyond the traditional
scope of Medicaid, SCHIP was clearly intended to target low-income
uninsured children in families at or below 200 percent of the
federal poverty level (FPL): $44,100 for a family of four in
2009.[4] State officials, however, have used their
broad authority to expand eligibility to children in families with
higher incomes.[5] By 2009, only seven states had eligibility
below 200 percent FPL. Thirty-three states set eligibility between
200 and 250 percent FPL. Eleven states expanded eligibility above
250 percent FPL.[6]

SCHIP and Previous Research on
"Crowd-Out"

With the creation of SCHIP and subsequent state expansions in
eligibility beyond the initial target population, concern has been
raised about the unintended consequence of public programs crowding
out private coverage and funding. There is a robust body of
research on crowd-out. In 1996, economists David Cutler of Harvard
University and Jonathan Gruber of MIT were the first to provide
quantitative support for the notion that expansions in public
program eligibility can reduce a program's "bang for the buck" in
reducing the ranks of the uninsured.[7] Looking at Medicaid
eligibility expansions between 1987 and 1992-mostly expansions to
cover children from families with higher incomes-Cutler and Gruber
found that approximately 31-40 percent of the increase in Medicaid
coverage of children was offset by reductions in private coverage.
In other words, for every 100 children who became newly eligible
for Medicaid, 31-40 would have otherwise had private insurance.

More recent research has for the most part corroborated Cutler
and Gruber's findings. In one widely cited study, Gruber and Kosali
Simon of Cornell University focused on public program expansions
between 1996 and 2002-the time during which SCHIP was enacted and
implemented-and concluded that crowd-out was "significant."[8]

The Congressional Budget Office (CBO) initially assumed that the
creation of SCHIP would lead to sizeable crowd-out, around the
level of 40 percent.[9]Later, in 2007, the CBO concluded that
reliable estimates of crowd-out as a result of SCHIP expansions to
date were probably somewhere between 25 and 50 percent.[10]
Likewise, a report commissioned by the Centers for Medicare and
Medicaid Services states that estimates of crowd-out in SCHIP have
ranged between 10 and 56 percent.[11]

However, crowd-out would likely be larger if income eligibility
were further expanded since children in families with higher
incomes are more likely to have private insurance to lose if they
were to become newly eligible for public coverage. Crowd-out thus
has major implications for the sources of health insurance coverage
for millions of children and the most prudent use of taxpayer
dollars.

If Congress expands SCHIP eligibility to children with higher
incomes without real protections against crowd-out, taxpayers would
be required to fund coverage for both the targeted uninsured
population as well as many children who would have otherwise had
private health insurance. Congress should therefore be concerned
about the inefficiencies inherent in pursuing public program
expansions as a blunt instrument for covering the uninsured.

Heritage Research: Higher Income,
Bigger Crowd-Out

A Heritage Foundation econometric analysis of crowd-out, using
data from 1996 to 2003, supports several important conclusions.
First, as SCHIP eligibility levels were extended to include
children with higher incomes, roughly one-third of the
children who became publicly insured had private insurance before
the expansion.

A second important finding is that crowd-out of private health
coverage grows as coverage under SCHIP becomes available to
children with higher incomes. Such a result is expected, since the
families of these children are more likely to be able to afford
their own insurance or have a parent with access to
employer-provided insurance before an expansion in program
eligibility.[12] In fact, the Heritage study found that as
eligibility for public coverage was extended to children in
families with incomes between 200 and 300 percent of FPL, as many
as half of those children who had been transitioned into
public coverage would have otherwise had private insurance.

A third important finding of the Heritage analysis is that the
magnitude of the crowd-out effect depends on the measurement of the
group that has become publicly insured. If it includes children who
were privately insured before the expansion and then have
both public and private coverage-that is, those with
overlapping coverage-the magnitude of crowd-out is slightly higher
than those identified as transitioning from private-only to
public-only coverage. In measuring the movements of children in
families that initially have only private insurance and have only
public coverage after the expansion, it is possible to miss a
significant number of the transitions from private insurance and to
public programs.[13]

Imposing Higher and Unnecessary
Costs

Congress's proposal to expand public programs as a means of
covering uninsured children up to 300 FPL would come at a cost to
both the federal government and the states who share in both the
financing of SCHIP and Medicaid.

Static estimates for covering uninsured children below 300
percent of the FPL-through public programs, in the absence of
crowd-out-would produce an additional cost of $15.3 billion in year
one (the federal government would contribute $9.6 billion and the
states would contribute $5.7 billion). Without accounting for
crowd-out, however, cost estimates are likely to significantly
underestimate the true cost of a program expansion.

Heritage estimates that the total cost of covering uninsured
children below 300 percent of the FPL is likely between $21.9 and
$24.7 billion in the first year-the federal government contributing
between $13.8 and $15.7 billion and states contributing between $8
and $9 billion. Under the Heritage estimate, crowd-out itself could
add an additional $6.6 billion to $9.4 billion per year.

The cost of crowd-out alone under Congress's expansion could,
therefore, be larger than the total current federal allotment for
SCHIP ($5 billion) and possibly even larger than the entire
total-federal and state-cost ($7.1 billion) of the SCHIP program
today. The Senate must reverse these dynamics by including policies
that restrict the crowding out of private coverage and funding
while enabling children in families with existing private health
insurance to keep it.

Protecting Private Coverage

The Senate should address the problem of crowd-out by focusing
SCHIP on children in low-income families while adding further
measures to protect the private coverage of millions of American
children. That way, more families would be able to keep private
coverage and taxpayers would not be billed for higher and
unnecessary costs while low-income uninsured children gain access
to the coverage they need.

Paul L. Winfree is a Policy
Analyst in the Center for Data Analysis and Greg D'Angelo is a
Policy Analyst in the Center for Health Policy Studies at The
Heritage Foundation.

[1]This
figure represents 2009 dollars for a family of four. The
eligibility for SCHIP coverage at this level would thus equal 300
percent of the Federal Poverty Level (FPL), well above the 200
percent level that was the original target level and purpose of the
SCHIP legislation.

[3]"Section 2101(a) of the Social Security Act
describes the purpose of the SCHIP statute "to initiate and expand
the provision of child health assistance to uninsured, low-income
children in an effective and efficient manner that is coordinated
with other sources of health benefits coverage.'" See letter from
Dennis Smith, Director of Center for Medicaid and State Operations,
Center for Medicare and Medicaid Services, to State Health
Officials, August 17, 2007, at www.cms.hhs.gov/smdl/downloads/SHO081707.pdf(January
23, 2009).

[5]See,
for instance: Donna Cohen Ross et al., "Determining Income
Eligibility in Children's Health Coverage Programs: How States Use
Disregards in Children's Medicaid and SCHIP," Kaiser Commission on
Medicaid and the Uninsured, May 2008, at /static/reportimages/20AC55DCDA76D2DB76F86B34B9D9FC1E.pdf
(January 23, 2009).

[6]Donna Cohen Ross and Caryn Marks, "Challenges
of Providing Health Coverage for Children and Parents in a
Recession:: A 50-State Update on Eligibility Rules, Enrollment and
Renewal Procedures, and Cost-Sharing Practices in Medicaid and
SCHIP in 2009," Kaiser Commission on Medicaid and the Uninsured,
January 2009, p. 6, at /static/reportimages/C630F7201488D5905EE3ABD7FCD760B3.pdf
(January 26, 2009). The original SCHIP legislation allowed states
with Medicaid eligibility near 200 FPL to expand eligibility 50
percentage points above their initial Medicaid levels. However,
today many of these states have exceeded this threshold set in
law.

[13]One potential explanation for these missed
transitions could be that families whose children are transitioned
onto public insurance have parents who stay with their
employer-based or other private insurance plan.

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When the Senate considers the House legislation or a companionproposal to expand SCHIP to children in families with higherincomes, it should recognize that public program expansions wouldresult in "crowd-out."

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